The discussion to this point has operated under the assumption that support and resistance represent genuine, if imprecise, market phenomena. However, there is much debate about this point. Many traders believe support and resistance levels are “mirages” — meaningless, random aspects of price charts. These traders believe the only significance a support or resistance level has is that conferred upon it by chartists themselves.
It is not difficult to imagine that a certain resistance level may form because, say, a large institutional trader may have a pre-set price level at which to sell a large position. Support and resistance levels can, in this sense, be interpreted as a natural outgrowth of the interaction of supply and demand in any market. For example, increased demand will cause market rise, creating an uptrend. But when price has risen to a certain level, traders and investors will take profits and short sellers will come into the market, creating “resistance” to further price increases. Price may retreat from and advance to this resistance level many times, sometimes eventually breaking through it and continuing the previous trend; other times reversing completely.
However, if multitudes of traders can easily see and react to the same support and resistance levels, how significant will penetrations of such levels be without some underlying catalyst to keep the move going? For example, penetration of a well-defined resistance level might trigger immediate buying by all the traders who view such a development as important in and of itself, but if there is no fundamental reason for the market to continue higher, the move could easily fizzle out. On the other hand, it could be argued if the breakout above the resistance level is the result of the aforementioned institution filling its sell order, there is nothing left to keep the market from moving higher.
Subscribe to:
Post Comments (Atom)
Post a Comment